Where To Invest While You Are Falling Down The Fiscal Cliff

With the fiscal cliff D-day approaching and the 2012 elections over, analysts are concerned over the fearful consequences should the government let the Bush tax cuts expire, increasing the tax burden for individuals as well as businesses. The consequence - that much less to spend in a consumer-driven economy and the expected budget cuts can lead the economy into recession all over again.

While experts are worried whether the government will let people "fall" over the fiscal cliff or will there be a deal between the White House and the lawmakers, investors are concerned about their portfolios, hard put to decide which stocks to buy, sell and hold.

What Should Investors Do

The dual problem of deficit and debt is not of only spending more, as perceived by most Americans, but also of insufficient revenue. Deal or no deal, for the revival of the economy fiscal discipline is a must -just as budget cuts are necessary, so is increase in revenue (read tax increase). Only a plan that takes into account this fact will be economically sound. If political compulsions come in the way and economically unsound compromises are made, it would present great dangers for the stock market.

Any plan for putting the economy back on the road to recovery augurs a lot of pain - there is likely to be a drop in GDP and a significant fall in corporate earnings. Already there are signs of companies becoming more cautious and there have been a few announcements of layoffs. On the other side, there is plenty of cash lying with companies waiting to be invested, which is not happening due to uncertainty about government policy. Weak demand from China and news of recession in Europe have all hurt performance of some of the leading corporations. McDonald's (NYSE:MCD) rare drop in global sales is a sign that the consumer is also becoming more cautious.

If I were you, before anything else I would prepare to protect my capital. I would use the current rally (notwithstanding the day-after-election fall) to get out of underperforming stocks. Despite the QEs and stimulus and tax cuts, the stock market rally is still not as strong as one would like it to be.

The problem however is that cash does not earn much and we need investments for money to grow at a reasonable speed. Personally, I would be wary of index ETFs such as SPDR S&P 500 ETF Trust (NYSEARCA:SPY), PowerShares QQQ Trust ETF (NASDAQ:QQQ) and SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA).

Instead, ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT) is a good bet. It seeks daily investment results that correspond to 200% inverse of the daily performance Barclays Capital 20+ Year U.S. Treasury Bond Index. Simply stated, it goes up when interest rates rise. Considering the present state of the economy, the only direction that interest rates can take is northwards.

On the way down from the so-called fiscal cliff, the financial system is likely to take the biggest hit. This makes me look at another ETF, ProShares Short Financials (NYSEARCA:SEF), which seeks daily investment results corresponding to the inverse of the daily performance of the Dow Jones U.S. Financials Index, meaning it goes up when bank stocks go down.

On the other side, if I was invested in large cap stocks such as Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) and Oracle (NYSE:ORCL), I would try to get out of these. Although these are great value stocks, they have run up quite a bit over the last couple of years. It makes little sense staying invested in them unless I am looking at very long term scenarios. Especially Apple; the way this stock is behaving lately, given the fundamental changes in the company since the demise of Steve Jobs, and given my long-held conservative view that what is too good to be true is never true, I would be very cautious about going into this stock at $542 today.

Healthcare REITs

Having survived the Supreme Court earlier and now the test of elections, Obamacare is the law of the land. In about less than a year from now, the uninsured will be able to sign up for insurance. Once the Bush era tax cuts expire, dividend income will again come to be taxed as ordinary income. Since REITs are already taxed as such, it will level the playing field for them. Another reason for choosing healthcare REITs is that traditionally the sector has been considered a defensive sector as it is not cyclic in nature.

Ventas is a leading Healthcare REIT and an S&P 500 constituent. It is also the biggest owner of senior housing and healthcare properties in 47 states and two provinces in Canada, with exposure to almost all types of healthcare facilities. Out of a total acquisitions of $13 billion since 2011, Ventas acquired assets worth $1.7 billion in 2012. At the current stock price Ventas is valued at $18.85 billion and has a dividend yield of 3.89%, which is an important portion of the YTD return of 18.71% to investors. Ventas has been beating consensus EPS forecasts continuously for the last three quarters.

The strong point of Ventas, as CEO Debra A. Cafaro said in an earnings meet, is its liquidity that allows the company "to take advantage of opportunities and be a safe haven for investors in a disrupted market". The company's current available liquidity is $1.6 billion.

OHI is a self administered real estate investment trust that invests in income-producing healthcare facilities. The focus of the company is in long-term care facilities located across the United States along with providing mortgage or lease funding to skilled nursing facilities. With a market cap of $2.49 billion, the company has a dividend yield of 7.91% and EPS of $1.00.

The company is a safe player in its space. 83% of its assets are free of any encumbrance of any sort. In addition, as a principle, it adheres to leverage ratio of not more than 60%. A strong balance sheet and significant cushion on financing agreements imply that Omega is better equipped to withstand a downturn should there be any cuts in Medicare and Medicaid.

With a market cap of $5.74 billion, Royal Gold, Inc. is a fairly large company involved in the business of acquiring and managing precious metals royalties and similar interests. The company reported record royalty revenue of $77.9 million in first quarter fiscal 2013, an increase of 21% year over year. Royal Gold has a dividend yield of 0.68 and an EPS of $1.62. Having completed its recent offering of common stock in October 2012, the company intends to use the $472.5 million proceeds for acquiring additional royalty. In addition, there is also the opportunity of benefiting from increases in the price of precious metals.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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